Job Cuts From Sequester Could Be Expensive

Without a deal in place yet to avoid Friday's sequester — the start of mandatory cuts in defense and discretionary spending — companies with U.S. government contracts must figure out which workers will likely be laid off as the funds to keep them on the payroll will disappear.

The federal government spends more than $500 billion a year—- or roughly 14 percent of the federal budget —- on private-sector contractors, and an estimated 7.5 million people are employed through government contracts.

Hundred of thousands of workers face being let go after Friday in order to reach reductions in defense by $500 billion and nondefense by $700 billion to reduce the deficit this year and over the next decade by at least $1.2 trillion.

In many cases, it won't be easy, said Connie Bertram, a labor and employment lawyer at Proskauer, as firms have to consider issues like benefit packages, accrued leave pay and possible legal action from laid-off workers.

"Sequestration can't be used as a tool to lay people off. Firms have to follow state and federal laws when it comes to letting people go," Bertram said. "That means they have to justify the layoff beyond sequestration in many cases. A worker would have to be told why he or she is being let go." (Read More:Are You Ready for Pain of Sequestration?)

"Given the scope of program cutbacks, the risk of litigation is high," Bertam said. "Contractor employees often work in highly specialized fields, so if entire programs are eliminated or substantially reduced, it will be difficult for former employees to find comparable employment. This is a recipe for workers to sue the firm."

"And If you're making a decision between two people, the one let go could legally challenge it," Bertam added.

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Deciding how to pay laid-off or furloughed workers is major headache for companies.

"Do they get unpaid leave or take a reduction pay scale or work only certain hours of the week? Do salaried workers become hourly workers and lose health benefits? There's a lot to consider," Bertram said.

And their role is often dominant. The Department of Energy spends 90 percent of its budget on contractors that manage the agency's sites and other duties, according the Government Accountability Office.

At this point, it's difficult to know what action to take for workers and sequestration, saidRandy Belote, a Northrup Grumman spokesman.

"We can't really plan what workers might or might not need to be laid off because we just don't know, " Belote said. "We are waiting to hear from the Defense Department which areas will shut down."

"Obviously we have communicated to our workers the possibility of layoffs or furloughs, but we haven't put anything in place yet to plan for who might be let go," Belote said Tuesday. (Read More: 5 Reasons Not to Worry About Sequestration)

Companies would be wise to take at least one action now — and possibly save money and avoid legal headaches — instead of waiting, said Dave Kurtz, a partner in Edwards Wildman's Labor & Employment group. He said firms should be issuing WARN notices to workers.

That's the Worker Adjustment and Retraining Notification Act, which requires most employers to provide a 60-day notice in advance of plant closings and mass layoffs to nonunion workers.

"The White House has issued a wavier on WARN because of sequester, but it's not clear if that's completely legal, so firms would be wise to issue one now," Kurtz said. "Otherwise they could face legal action from workers and the associated costs."

Those costs could be an economic hot potato between Congress and the contractors, said Bertram.

"As part of the White House waiver, they said firms could add costs associated from not issuing WARN notices to their contracts and charge the government," Bertram said. "But Congress is balking at that, so it's in [the companies'] best interests to get them out, even if sequestration doesn't happen."

Union workers at firms with government contracts could also take legal action as a result of sequester, said Kurtz.

"Those workers could, through their unions, file unfair labor suits against the firms because of sequestration," Kurtz said.

"But the irony is that those actions would likely end up in front of the Labor Relations Board but because of sequestration, there wouldn't be anyone there to hear their case," said Kurtz.

What's left between now and Friday and possibly beyond if a deal to stop the sequester is not reached is a lot of agony for everyone, say experts.

"Workers laid off will likely go into their savings if they have any or use their retirement funds to live and lose their health benefits," said Kurtz. "it's not a pretty picture."

"The sequester could impact companies for a long time and close down whole areas of production," said Bertam. "And imagine if a worker is told he's not coming back even if the sequester ends. It won't be easy trying to find another job."